Cook County expects surplus this year, gap near $100 million next year

Cook County expects to end the current fiscal year with a surplus providing some cushion as it looks to erase an $85.6 million gap looming in the next budget as rising salary and pension expenses, healthcare, and a state change on personal property replacement tax distributions weigh on the county’s fiscal landscape.

The gap next year is up from the $18.2 million shortfall projected heading into the fiscal 2023 budget season but down from $121.4 million projected shortage in 2022 and the near-record $410 million hole that loomed in 2021 as the county grappled with COVID-19-pandemic wounds.

“Years of hard work have put us in a strong fiscal position. This is one of the smaller gaps of my administration and we are proud of what we have done to create this sturdy financial foundation,” Cook County Board President Toni Preckwinkle said.

The gap comes from a $3 million deficit in the hospital system fund and $82.6 million hole in the general fund. The general fund gap is due to a combination of factors, including a $22 million increase in pension contributions, scheduled salary increases, rising information technology expenses, and cut in the personal property replacement tax distribution from the state.

The health fund gap is due to rising costs associated with salaries and healthcare for asylum seekers arriving in Chicago, which so far has carried a $1.8 million monthly price tag, as well as lower revenue expected as some lose their Medicaid coverage due to the post-pandemic redetermination this year. A spike in the number of asylum seekers could drive up costs.

The county expects to hold talks with the state over the cost pressures.

“There’s no tax hikes contemplated — we are going to be able to” close the gap without them, Preckwinkle said during a briefing Wednesday.

Some portion of the $215 million surplus expected this year in the $1.97 billion general fund and $402.1 million surplus in the $3.99 billion healthcare fund could help close a portion of the gap.

The general fund surplus will go into the county’s unassigned fund balance bringing it to over $900 million, according to county deputy CFO Dean Constantinou. Flush reserves helped draw positive rating actions since 2022.

The county will look at potentially using portions of the unassigned fund balance if it exceeds its targeted ceiling for the fund but would use it only for “one-time expenses” in order to “maintain structural balance,” Cook Chief Financial Officer Tanya Anthony said during a budget briefing Wednesday.

The general fund surplus stems from rising interest rates on investment income and stronger than expected sales taxes as well as higher-than-expected personal property replacement taxes this year — with a fall expected next year — and payroll savings due to hiring struggles with a tight labor market.

The health fund surplus stems from delays in the Medicaid redetermination process, delayed hiring amid the tight labor market, and higher-than-expected Medicaid reimbursements.

The county is currently operating on an $8.8 billion budget that includes a $7.25 billion operating budget. The county received $1 billion in federal pandemic American Rescue Plan Act relief and spent $230 million as of May.

Sales taxes are projected to grow modestly to $1.13 billion next year from $1.125 billion while the county’s share of personal property replacement taxes is expected to experience a drop — due to state changes in the distribution formula — to $75 million next year from an expected $133 million this year.

Economic risks from a potential recession that would impact the county’s economically sensitive tax streams — like the sales tax — the banking crisis that impacts access to credit, and the war in Ukraine also pose threats as the county finalizes its projections.

The county anticipates the federal post-pandemic resumption of the redetermination process for Medicaid eligibility will lower its CountyCare membership beginning in July this year, cutting into associated revenue with a hit also taken by a shift in patients covered by Medicaid to uncompensated care, lowering revenue generated from patient fees.

The county heads into the next budget, which covers the fiscal year beginning Dec. 1, with more pension certainty after lawmakers passed legislation codifying the county’s supplemental contributions into an actuarially based formula that aims for 100% funding in 30 years.

Cook County has $6.3 billion of unfunded pension liabilities and a funded ratio of 67.2% with the latest results expected to lift it to over 70%. The county this year is making a $291.7 million supplemental contribution above a $200 million required payment under the former statutory formula.

This year’s contribution brings to $2.34 billion the extra funding sent to the pension fund over the last six years since the sales tax was raised to save the fund from insolvency. The county also plans a $20 million payment into a special pension stabilization fund this year.

The legislative overhaul incorporates changes to the pensionable salary cap that raise benefits for employees hired beginning in 2011 who fall under a Tier 2 level of benefits. The changes are designed to avoid triggering the Social Security Administration’s Safe Harbor provision that requires public employees who don’t pay into Social Security to receive at least the same benefit level.

The changes will add $3 million to the county’s annual payment tab and $99 million in present value terms over the 30-year amortization period.

The legislation also allows the county to use any funding source for payments — it was previously required to use property tax revenue, and Anthony said Wednesday the finance team was reviewing how it would cover pension contributions in future years under the new flexibility.

Preckwinkle will unveil her budget proposal in October.

Reversing a trend of negative actions, Fitch Ratings lifted the county’s GO rating to AA-minus from A-plus in 2022, assigning a stable outlook, and S&P Global Ratings returned the county’s outlook to stable from negative and affirmed the A-plus rating.

Fitch and S&P affirmed the ratings ahead of a summer 2022 GO sale. Moody’s Investors Service affirmed its A2 rating and revised its outlook to positive from stable.

“The rating is likely to move upward if the county can sustain strong financial reserves and balanced operations despite potentially deteriorating underlying economic conditions and myriad challenges and uncertainties associated with operation of a large safety net health system,” Moody’s said.

The county has $2.6 billion of general obligation debt and $570 million of sales tax bonds. The county’s August sales tax issue carried an S&P rating of AA-minus and AAA rating from Kroll Bond Rating Agency.